On Retail Competition
Over at Knowledge Problem, Michael Giberson reports that a shake-out is occurring in the Texas retail market and asks whether vertical integration might have been a better option for Texas.
I don’t have Sally Hunt’s book to hand, and I know that there are complex issues involved in this case, but here are some quick thoughts.
1. The end result of vertical integration is a situation like we have in the UK where there is no serious wholesale market in electricity, and consequently much less transparency in the market. Transparency, in general, is a good thing, and I don’t like doing without it.
2. Texas is experiencing a shake-out of retailers because it, like California, made the foolish assumption that the retail market would see enthusiastic and successful new entry. All of the experience around the world suggests that this does not happen. Energy retailing is a business in which economies of scale are everything, and new entry is practically impossible. The Texas market will eventually settle down to a small number of very large companies all of which, I suspect, will also have retail businesses in other states.
on March 4th, 2009 at 3:44 pm
[…] Cheryl Morgan summarized my post as asking “whether vertical integration might have been a better option for Texas,” but I wouldn’t say it quite that way. “Vertical integration” in the electric power industry is typically conceived as bundling retail, local distribution, transmission, and generation. As I recall Sally Hunt’s point (in her book, Making Competition Work in Electricity, and I too don’t have the book handy so I’m relying on memory), she argued that it make sense to unbundle the wires from the non-wires portions of the business, but it wasn’t inherently desirable from a policy standpoint to unbundle retailing from generation. […]